Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail

by Ray Dalio

The times ahead will be radically different from those we’ve experienced in our lifetimes, though similar to many times in history.

A few years ago, I observed the emergence of a number of big developments that hadn’t happened before in my lifetime but had occurred numerous times in history. Most importantly, I was seeing the confluence of huge debts and zero or near-zero interest rates that led to massive printing of money in the world’s three major reserve currencies; big political and social conflicts within countries, especially the US, due to the largest wealth, political, and values gaps in roughly a century; and the rising of a new world power (China) to challenge the existing world power (the US) and the existing world order. The most recent analogous time was the period from 1930 to 1945. This was very concerning to me.

As I studied history, I saw that it typically transpires via relatively well-defined life cycles, like those of organisms, that evolve as each generation transitions to the next.

By seeing many interlinking cases evolve together, I could see the patterns and cause/effect relationships that govern them and could imagine the future based on what I learned. These events happened many times throughout history and were parts of a cycle of rises and declines of empires and most aspects of empires—e.g., of their education levels, their levels of productivity, their levels of trade with other countries, their militaries, their currencies and other markets, etc.

This Big Cycle produces swings between 1) peaceful and prosperous periods of great creativity and productivity that raise living standards a lot and 2) depression, revolution, and war periods when there is a lot of fighting over wealth and power and a lot of destruction of wealth, life, and other things we cherish. I saw that the peaceful/creative periods lasted much longer than the depression/revolution/war periods, typically by a ratio of about 5:1, so one could say that the depression/revolution/war periods were transition periods between the normally peaceful/creative periods.

Before I get your head spinning with all this cycle stuff, the main thing I want to convey is that when the cycles align, the tectonic plates of history shift, and the lives of all people change in big ways.

the swinging of conditions from one extreme to another in a cycle is the norm, not the exception.

the really big boom periods and the really big bust periods, like many things, come along about once in a lifetime and so they are surprising unless one has studied the patterns of history over many generations. Because the swings between great and terrible times tend to be far apart the future we encounter is likely to be very different from what most people expect.

Anyone who studies history can see that no system of government, no economic system, no currency, and no empire lasts forever, yet almost everyone is surprised and ruined when they fail.

one’s ability to anticipate and deal well with the future depends on one’s understanding of the cause/effect relationships that make things change, and one’s ability to understand these cause/effect relationships comes from studying how they have changed in the past.

From that learning came a visualization of an archetypical sequence of how rises and declines in wealth and power typically happen.

1 To be clear, while I am describing these cycles of the past, I’m not one of those people who believes that what happened in the past will necessarily continue into the future without understanding the cause/effect mechanics that drive changes. My objective above all else is to have you join with me in looking at the cause/effect relationships and then to use that understanding to explore what might be coming at us and agree on principles to handle it in the best possible way.